Debt Management

DM 20

Written evidence submitted by The Debt Resolution Forum

1. SUMMARY   

1.1. Debt Resolution Forum : DRF is a trade association with 29 full members. We provide academically accredited training, authoritative independent monitoring and an independent complaints procedure for the debt resolution industry. We are in the course of obtaining OFT consumer code approval for our standards.  

1.2. Personal Insolvency : Debt resolution companies offer advice on debt solutions free of charge and charge for the implementation and operation of formal and informal debt repayment plans. DRF believes that the perception that free advice is good advice is often wrong and that a level playing field between free to client and fee charging commercial organisations would benefit debtors and creditors – and ensure access to appropriate debt advice for all.  

1.3. Debt Advice : DRF believes financial education would make little difference to debt resolution, because high levels of innumeracy and illiteracy amongst the group who would benefit most mean they would be unable to take advantage of it. Most intractable debt is caused by a sudden change in circumstances and debt levels are much higher than formerly, partly because high levels of debt are required to fund consumer spending that plays a significant role in Britain’s economic growth. A debt resolution culture that encourages consumers to repay, is affordable and achievable and which rehabilitates debtors as a reward would, DRF believes, create more positive outcomes and encourage people to deal with debt early.  

1.4. Range Of Debt Solutions : DRF believes there is an opportunity to create a more effective and balanced set of debt resolution options for consumers by combining the best features of the Scottish Debt Arrangement Scheme, the Enforcement Restriction Order and the original concept of the Simple IVA into a single process. Bankruptcy needs to be available for those who cannot afford to repay debt, but debtors who can pay, but won’t, should be encouraged to use a debt repayment solution like a debt management plan or individual voluntary arrangement.  

1.5. Access To Debt Solutions : DRF believes new OFT debt management guidance, trade association membership and monitoring mean that compliant fee-charging debt resolution companies will offer appropriate advice and signpost debtors to free to client sources when this is appropriate. Training means debtors can have confidence in advice from DRF member companies. Over standardisation and simplification of advice models can mean debtors receive inappropriate advice. Introducing simplified procedures may reduce costs .  

1.6. Consistency Across Debt Solutions : Consistency in calculating income and expenditure is vital. But rigid application of guidelines leads to poor decision making in cases that don’t fit the model. Creditors should be encouraged to reward debtors who choose to repay debt and perform when doing so by rehabilitating them and providing access to financial services on the same terms as customers who have not experienced debt problems.  

2. DEBT RESOLUTION FORUM   

2.1. Who we are : Debt Resolution Forum (DRF) is a trade association for fee charging compa nies that provide debt resolution services for indebted consumers including:  

· Individual Voluntary Arrangements

· Debt Management Plans

· Bankruptcy Advice

· Repossession Advice.

2.2. Membership [1] : DRF currently has 29 full members (trading companies providing debt solutions), three provisional members (trading companies who have not yet fulfilled all DRF’s membership requirements), two affiliates (companies that provide services – e.g. software – to our members) and one introducer member (introducers are companies that refer consumers for debt advice: this is an area we are expanding).

2.3. Standards [2] : DRF has a set of standards with which members are required to comply (members sign an annual return indicating their compliance, which is subject to inspection (see 2.5 below).

2.3.1.1. DRF is currently applying for Office of Fair Trading (OFT) consumer code approval and is close to completing stage one of the scheme. The standards exceed those required for both the current and forthcoming OFT Debt Management Guidance.

2.3.1.2. DRF’s standards cover:

· Section A: Standards applied by DRF members in their work with and on behalf of debtors

· Section B: Standards applied by DRF members in their dealings with creditors

· Section C: The training, qualification and continuing professional development of DRF members’ management and staff

· Section D: Corporate standards of governance adopted by DRF members

· Section E: Client Funds

· Section F: Advertising and Publicity

· Section G: Fees and other charges

· Section H: Complaints

· Section I: Statements/reviews/information provided by the DRF

· Section J: Regulatory Framework

· Section K: Development of standards

2.4. Training : DRF members are required to train their client-facing staff to the standards of the Certificate in Debt Resolution (CertDR) . This is an EdExcel academically accredited qualification for which DRF is the training and examination centre.  

· Module 1

o Unit 1 The debt market

o Unit 2 Debt resolution

o Unit 3 Debt regulation and ethics

· Module 2

o Unit 4 The implications of over-indebtedness

o Unit 5 Improving disposable income and making use of assets

o Unit 6 Debt resolution through unsecured restructuring solutions

o Unit 7 Negotiated debt reduction solutions

· Module 3

o Unit 8 Evidencing client advice and servicing

o Unit 9 Case studies

2.4.1. The qualification requires 210 hours study across three papers covering all aspects of advice for consumers with debt issues. A score of 70% is required to pass each paper and approximately 70% of candidates pass first time. The qualification is considered to be to post A-level standard.

2.4.2. Currently 152 learners have achieved the Certificate and are allowed to put CertDR after their names. A further 100 have taken the "Award" achieved on successful completion of the first module. There are a further 245 registered learners.

2.5. Inspection & Monitoring : DRF has arranged for annual inspections of members’ compliance with DRF and OFT standards by the Insolvency Practitioners Association (IPA) [1] , one of the recognised professional bodies authorised by BIS (through the Insolvency Service) to authorise and inspect licensed insolvency practitioners.  

2.5.1. Monitoring is undertaken over a three-year cycle. The first year requires a five day "visit" by a team of two inspectors, three days on site and two days spent examining websites, written material and report writing. In years two and three there is a one-day site visit (and two days for off-site monitoring and reporting), unless areas of serious non-compliance have been discovered and require to be reassessed [2] .

2.6. Complaints R esolution : DRF has an independent complaints committee [1] with a majority of lay members, currently chaired by David Hawkes, National Money Advice Co-ordinator of Advice UK. DRF will hear complaints fr om consumers and creditors.  

2.6.1. DRF’s complaints procedure [2] does not interfere with the consumer’s right to use the Financial Ombudsman’s complaints scheme.

2.6.2. DRF has a range of sanctions to apply to members against whom complaints are upheld, including exclusion from membership and publicising upheld complaints.

2.7. Res ponses to consultations , influencing public policy : DRF participates in public consultations [1] wherever possible and has made responses to papers including:  

· Ministry of Justice consultation on regulated debt management plans

· OFT response to Citizens Advice super-complaint on up-front fees and cold-calling

· OFT consultation on proposed debt management guidance

2.7.1. DRF has dialogue with the OFT and, more recently, with the Money Advice Service. DRF is participating in the Insolvency Service review relating to protocol compliant debt management plans. DRF was a member of the IVA protocol standing committee.

2.7.2. DRF is a member of Money Advice Liaison Group (MALG).

2.8. Future plans : DRF’s plans for 2012 include:  

· Introduction of a Diploma level qualification, initially with modules covering advanced advice on benefits and helping especially vulnerable people

· Introduction of compulsory continuing professional development for CertDR holders, including basic training on dealing with more vulnerable consumers

· Introduction of a monitoring/accreditation scheme for lead introducers

· Introduction of "chapters" to facilitate communication with creditors and free advice bodies.

· Development of desktop monitoring of members’ cases.

3. PERSONAL INSOLVENCY   

3.1. Free and Impartial advice: DRF members charge for their services but do not charge for their initial advice, which is often considerable. We are transparent about our charges, compliant with OFT guidance and will advise on and signpost all solutions, even when we cannot charge for them.   

3.1.1. DRF is concerned that advice from free-to-client organisations is not always appropriate advice and believes these issues were not looked at in any depth by the BIS "call for evidence". For example:   

· Many plans offered by free-to-client providers do not offer anything beyond advice when a debtor is unable to cope with the requirements of making individual payments to creditors.   

· Where distributions are made by free-to-client providers, or on their behalf, we understand that these may not include minimum distribution arrangements and that the costs incurred may not be clear to consumers.

· In some cases, free to client companies offer token payment DMPs when this is not the most appropriate advice for the client (frequently, bankruptcy is the correct alternative).

· Some free-to-client advice agencies appear to offer a far lower proportion of specific debt solutions (for example, IVAs) than volume and demographics indicate they should. This under advising could significantly harm many hundreds or thousands of consumers.   

· Many indebted consumers can afford to pay for debt advice (a cost, DRF believes, that should be shared with creditors).

· Some free to client advisers may charge for some of their services, yet not be open about that to the consumer.

· Some free to client services and debt advice charities provide leads, for payment, to other providers without revealing this arrangement to the debtor.

· The free advice sector does not have the capacity to offer all the debt advice required by British consumers.

3.2 Regulatory Landscape: DRF believes that the forthcoming revisions to OFT Debt Management Guidance and probable accompanying enforcement action will help create a fee-charging debt resolution sector that consumers and creditors can trust. We welcome and support this and believe we have been instrumental in putting in place the training, monitoring and complaints procedures that make this possible.   

3.2.1 However, DRF is concerned that the current and proposed regulatory framework does not create a level playing field between fee-charging debt resolution companies and free to client providers (whether charitable or creditor-funded). For example, the proposed OFT debt management guidance currently requires fee-charging debt resolution companies to take steps to ensure their evaluation of a consumer’s debts and ability to repay is accurate, this obligation is not placed on free-to-client providers. Clearly, advice based on inaccurate information is worthless.   

4. DEBT ADVICE   

4.1. Intervention by Lenders: DRF considers that lenders should be encouraged to determine whether a non-performing debtor has other debts with which the debtor is struggling. Where this is so, and the debtor indicates they cannot meet their commitments, a creditor should be encouraged to refer the debtor for advice on all her/his commitments.

4.2. Financial Education: DRF is concerned that financial education, whether of adult consumers, school pupils or higher education students, is seen as a panacea. We believe that, even if well-funded, it would have low impact on debt.

4.2.1. We believe that relatively few consumers get into debt because theyfail to understand the consequences of taking credit or failing to calculate whether they are overburdened.

4.2.2. There are clear indications that most consumers fail to repay debt because they suffer a financial shock (redundancy, partnership break down, illness, uninsured loss, childbirth are all common examples).

4.2.3. This financial shock may be more common in times of economic difficulty – but insolvency statistics show that a rise in indebted consumers seems to have a lagging relationship with availability of credit and an inverse relationship with numbers receiving jobseekers allowance.

4.2.4. Consumer insolvencies run at roughly five times the level experienced at the end of the twentieth century and this looks set to persist because consumer spending seems a significant contributor to UK economic growth and because we are a nation of borrowers, not spenders.

4.2.5. Whilst financial education could be of long term benefit it will not reach the most vulnerable, who are much more likely to require debt help: For the last twenty years one fifth of UK school leavers have entered the employment market functionally illiterate and innumerate. Until that is rectified, they would be unable to use any financial education they received.

4.2.6. Rather than financial education, DRF believes that it will be less costly, and more useful to both individual debtors and the economy as a whole, to concentrate on creating a rehabilitative debt culture: The biggest issue facing consumers is, because the stress, worry and fear of the consequences of debt, they take advice much later than they should which generally means the owe more, can pay less and the consequences of their debt are more onerous. It also means they usually are able to repay less of what they owe.

4.2.7. DRF believes debt management plans (DMPs) and IVAs are both intrinsically rehabilitative, as a consumer chooses to repay as much of their debt as they can afford, rather than walking way (which bankruptcy – whilst the consequences are drastic – usually allows).

4.2.8. DRF believes that consumers should be rewarded for demonstrating that they can manage their money (in an IVA or DMP) by agreement from creditors to allow them access to financial products at prime rates. Bankruptcy and DROs should be available for the most vulnerable and those without property assets but should be as punitive as it is now (with a higher rate of Income Payments Agreements and Orders) to incentivise those debtors who can pay to choose a more rehabilitative (and productive for creditors) regime.

4.3. Free advice: As noted above, DRF believes the fee-charging debt resolution sector has a role to play in helping UK debtors and that there are issues in ensuring there is a level playing field between free to client and fee-charging providers.

4.3.1. DRF also believes that consideration should be given to developing a new debt resolution procedure for England and Wales that could be provided, at reasonable cost by both fee and free sectors and which would embody the best features of the Scottish Debt Arrangement Scheme (DAS) the (never implemented) Simple IVA and the Enforcement Restriction Order (an enacted but unused provision of the Courts, Tribunals and Enforcement Act 2007 that provides for a stay on creditor actions in certain circumstances). DRF believes that introduction of the ERO could have saved many thousands of people who have become unemployed in recent months from returning to work with an irretrievable debt problem.

5. RANGE OF DEBT SOLUTIONS   

5.1. Debt relief options – balance: DRF believes that, by and large, the procedures available to debtors are fair and effectively balance the interests of creditors and debtor. However, evolving debt solutions, so that they encourage debtors to repay as much as they can, whilst learning how to manage their money, would have a profound effect on people’s attitude to debt and ability to cope as consumers. Behaviour is unlikely to change whilst consumers have an overwhelming fear of the consequences of debt. This could be changed by making the most productive debt resolution procedures more rehabilitative, by easing access to debt resolution for the most vulnerable and by requiring creditors to rehabilitate debtors as future customers when they show they can manage their money and repay what they can afford.

5.2. Improving current debt solutions: DRF believes consideration should be given to a procedure resembling Scotland’s Debt Arrangement Scheme, where the debtor undertakes to repay all the principal of their debt but where creditors are bound to freeze interest and charges whilst the debtor complies with the scheme. This could be combined with the Enforcement Restriction Order (ERO) (see 4.3.1) to maximise achievability. Should a debtors situation worsen, then a review of the DAS type procedure could lead, where appropriate to the debtor passing, without further creditor agreement, into a Simple IVA, allowing some debt forgiveness.

5.2.1. Consideration should also be given to stand-alone utilisation of the Enforcement Restriction Order. Creditors rarely allow any allowance for contingencies in DMPs (unlike IVAs). Use of EROs would allow many more DMPs to be completed successfully and would reduce debtors’ costs in many cases.

5.3. Flexibility: DRF believes a single procedure, which could be varied as the debtor’s situation demands (as envisaged in 5.2 above) could provide all the flexibility necessary to establish a best of breed debt resolution culture.

5.4. Moratorium: The presence of a moratorium on creditor action is rarely necessary in the case of a commercial debt management plan or an IVA, as it can usually be arranged sufficiently quickly to avoid negative consequences for the debtor (and creditors, by and large, co-operate when aware that a plan is mooted. There are, as always, exceptions).

5.4.1. A moratorium may have the unintended consequence of simply creating a breathing space within which debtors do nothing: There are indications that half of all those with debt problems exhibit symptoms of mental illness (especially depression) and failure to respond to a lifeline is very common.

5.4.2. However, if legislative time was available, or if a protocol could be agreed with creditors, on balance, a moratorium would be helpful.

6. ACCESS TO DEBT SOLUTIONS   

6.1. Where to go for debt advice: DRF believes that the OFT’s debt management guidance, due to come into force early in 2012, will make it possible to take enforcement action against fee-charging companies who offer solutions other than on the basis of appropriate advice. Monitoring by trade associations will support this. However, fee charging companies who are members of trade associations and who are subject to monitoring (DRF only, to date) already offer advice on the basis of client need and preference.

6.1.1. It is therefore DRF’s view that inappropriate advice is unlikely to be a significant issue going forward and that, where a client cannot afford a fee-charging plan, they will be signposted to other appropriate solutions.

6.2. Confidence in appropriate advice: Advisors who hold CertDR and who work in fee-charging companies have generally received more training and to a higher standard than, for example, those who hold the Institute of Money Advisors qualification. DRFs standards (and the new OFT debt management guidance) should combine to ensure debtors receive appropriate guidance, whether a fee-charging company has a suitable product or not (in which case the debtor will be signposted to appropriate advice sources).

6.2.1. The same cannot be said for free to client debt advisers, where IVAs appear to be under-recommended and minimum payment debt management plans are often preferred to bankruptcy.

6.3. Do debtors end up in the "wrong" solution? DRF believes that there is an element of choice for the debtor in the debt solution they prefer (a debtor with a great deal of equity in property may prefer a debt management plan to an individual voluntary arrangement, for example). In most cases it is clear that there is usually a "right choice" from the procedures available.

6.3.1. However, DRF believes that debtors’ situations vary widely and are less capable of a standardised response than, for example, they were when they were seeking credit. It is possible for different advisers to recommend different solutions and for both to be appropriate. The debtor’s concerns need to be fully addressed the consequences of those choices clearly explained to them.

6.4. Can costs be reduced? A new procedure, such as that outlined above, might be capable of being operated at costs below those of current procedures, across a book of cases, thus creating more value for debtor and creditor.

6.4.1. However, there are currently issues with creditors in IVAs who try to drive down IVA fees to levels close to, or below, the costs incurred in putting the arrangement in place and subsequently supervising it. This behaviour may be restricting access to the most rehabilitative of debt solutions.

6.4.2. DRF is concerned that funding Money Advice Service through creditor contributions may make access to debt advice more problematic because the creditors may become unwilling to also provide the "fairshare" funding that currently underpins a number of free to client advisors.

6.4.3. DRF believes that transparency, a level regulatory playing field and competition between providers will create the lowest fees possible, and the highest standards of service

6.4.4. DRF believes that consideration should be given to partial funding by creditors of all debt solutions – as they benefit from effective debt resolution, just as does the debtor.

7. CONSISTENCY ACROSS DEBT SOLUTIONS   

7.1. Calculating Income & Expenditure: Consistency in calculating income and expenditure is key to ensuring debtors are making their best efforts to repay what they owe and that the repayment plan is affordable and achievable. There are two commonly accepted sets of guidelines that most organisations use both of which are acceptable.

7.1.1. However, debtors’ cases are all individual and rigid insistence on guidelines sometimes means debtors are denied access to a procedure or that it is set at levels it is difficult for a debtor to achieve. Whilst creditors and creditor representatives are rarely completely inflexible, this could be improved.

7.1.2. Unexpected and necessary expenditure by a debtor is a common reason for the failure of a DMP, because creditors will rarely allow a sum for contingencies (say repairs necessary for a commuter vehicle to pass an MoT). Contingencies are usually allowed in an IVA. These means DMPs usually require a higher monthly contribution than an IVA with similar income and expenditure and the DMP is also less flexible and more likely to fail. This could be improved.

7.2. Outcomes of debt remedies and future access to financial services: DRF believes that creditors should give credit to debtors who enter schemes that encourage repayment and, where the debtor performs well, this should be reflected in future credit scores.

7.2.1. Bankruptcy should be considered as a procedure of last resort and, along with the Debt Relief Order, a no blame, no stigma, procedure for those who do not have the resources to repay debt.

7.2.2. For debtors who can repay, bankruptcy should be seen to be an onerous option without the rehabilitation that comes from choosing to make the effort to repay debt.

7.3. Common Entry Point or "Gatekeeper": DRF doubts that a single entry point could, with current technology, be sensitive enough to the needs of a debtor to be fully effective.

7.3.1. The information provided by debtors in the initial advice call is often significantly different to that provided when an advice pack is returned with the debtors’ documentation (statements, pay slips, etc.)

7.3.2. A single entry point could guide debtors to agencies who prefer specific solutions and may not advise appropriately on the full range of options.

7.3.3. If there is a level playing field for debt advice and if fee-charging debt resolution companies can demonstrate they are transparent and compliant, then competition will encourage efficiency. Low cost and the development of services without consumer detriment. A single portal would stifle this.

18 November 2011